Market Insights – 20th of May 2019

Each week, a team of experts shares its market views with you.

Contact us
Mountain summit landscape at sunset


China’s economy fell short of expectations in April, with growth in industrial output dropping to 5.4% year over year, and growth in retail sales slipping to 7.2%. This should prompt the Chinese government to maintain its stimulus measures, partly to offset the adverse effects of the latest round of tariff hikes.

The US business optimism index improved more than was forecast in April. But this was probably because people had expected the US-China trade spat to be resolved. If a deal is not reached soon, business confidence could falter, which would weigh on growth for the rest of the year.

The pound came under renewed pressure as uncertainty about Brexit rose. The financial markets did not react well to news that the talks between the Tories and Labour had fallen through, or to fears that Theresa May’s successor may push for a hard Brexit.

A rush for bonds before yields drop further into negative territory?

Swiss bond yields are once again heading downwards, and ten-year yields could well drop below their late-2018 low of –0.40%. Switzerland’s yields have been in negative territory almost non-stop since the SNB removed the franc’s peg to the euro in January 2015. Even the slightest escalation in geopolitical tensions – especially when it could harm the global economy – pushes long-term interest rates downwards. It’s therefore not surprising that yields dropped further after the trade talks between the USA and China broke down. All bond markets are currently experiencing the same trend. The ten-year Bund, for instance, is at its autumn-2016 low of –0.10%. Investors seem content with these paltry – and even negative – yields. They no doubt expect monetary policy to be loosened further in order to boost the global economy. But with the exception of the US Federal Reserve, most central banks can’t drop their key interest rates any lower and will have to use more unconventional methods, such as printing money. We’re not quite there yet though. We still expect the trade talks to end well, as that is in the interests of both sides. After all, Donald Trump may not be re-elected in 2020 if the economy loses too much steam.

What’s more, economic newsflow is improving in the USA, China and Europe, which might prompt central bankers to hold off on any further stimulus measures. This could also convince bond investors that current yields are nowhere near high enough to cover current or future inflation. Real yields (i.e. adjusted for inflation) are negative in all industrialised countries except the USA. Yields are therefore likely to rise slightly in the second half of the year. That is, unless the trade tensions escalate into an all-out trade war, requiring the authorities to take a more aggressive stance in terms of both monetary and fiscal policy. As we’ve already said, however, that’s a very unlikely scenario, although it can’t be ruled out completely.

Alternative funds – the renewed uncertainty is welcome!

With stock markets gaining ground from the start of January to the end of April, it’s no surprise that alternative funds are lagging behind. However, this trend makes less sense when you consider that alternative fund managers are only trying to protect capital. In Q4 2018, they reduced their equity exposure, which limited their losses when the stock markets plunged by close to 20%. However, this reduced exposure has weighed on performance this year, as it prevented them from fully taking part in the rally. Managers had been planning to buy on a dip in order to increase their exposure, so the constant uptrend caught them off guard. Unsurprisingly, the most directional strategies gained the most ground, while systematic and macro managers struggled to adjust to the rapid market rotation.

In recent weeks, geopolitical risks have increased considerably. So we don’t think the markets will be able to keep rising without the occasional correction. Such a return to normal would be good for the market, and it makes sense to increase allocations to assets, like alternative funds, that are less sensitive to a market downturn. The proof is in the pudding: since the start of the May correction, these vehicles have cushioned the blow and helped to limit losses by two thirds.


The Piguet Galland & Cie SA website (the "Site") describes the activities of Piguet Galland & Cie SA in Switzerland. Piguet Galland & Cie SA does not offer its services outside of Switzerland, and the Site is meant solely for individuals and legal entities domiciled in Switzerland, along with existing clients of Piguet Galland & Cie SA.

Personal informations
As our services are only available to Swiss residents, the choice of country of residence is not available.
You must accept the terms of use.
* required fields